Federal tax reform had been talked about for years without action, but we recently received the largest federal tax reform since 1986. Similarly, sales tax reform has been talked about, proposed, and argued about for years. The largest sales tax reform since 1992 may happen this summer.
For 26 years, remote retailers, online retailers or any retailer without a physical presence in a state, has not been required to collect and remit that state’s sales and use tax. That could all change this summer. The U.S. Supreme Court has agreed to review South Dakota’s case involving Wayfair, Inc. Oral arguments are expected in April with a potential decision in June.
What Started Talks of Sales Tax Reform?
States argue they have unjustly lost billions of revenue because sales tax goes uncollected on sales to in-state customers by remote retailers. They also argue the retail landscape has dramatically changed due to the Internet, and that requiring retailers to have a physical presence before they are obligated to collect sales tax is outdated.
The physical presence precedent or case that has been relied upon for 26 years is Quill v. North Dakota. The Quill case held that mail-order companies could not be required to collect sales tax because Quill did not have a physical presence in North Dakota. The Quill case has been followed by all states since.
The Wayfair Case
The Wayfair case involves a remote e-retailer (Wayfair) that does not have a physical presence in South Dakota. South Dakota passed a law in 2016 (SB 106) which imposes economic nexus. The law requires retailers to collect sales tax if the retailer has more than $100,000 of South Dakota sales in a year, or the retailer has more than 200 separate transactions with South Dakota customers. Wayfair Inc. challenged the South Dakota law which the South Dakota Supreme court found unconstitutional under Quill. The state appealed or petitioned the U.S. Supreme Court, and here we are.
Similar cases are currently in litigation in Alabama, Indiana, Tennessee, Virginia and Wyoming, but those cases will most likely stay in a holding pattern awaiting the Wayfair decision.
Possible Outcomes and Impact on Retailers
If the U.S. Supreme Court overturns Quill, then all retailers (online, remote or otherwise) who have not been collecting sales tax, would effectively be required to start collecting sales tax in any state in which the retailer has sales. There would be no physical presence test. A simple economic nexus test would be the standard.
For South Dakota, Indiana and Wyoming, the economic nexus standard of more than $100,000 of annual sales, or more than 200 sales transactions annually would be the test. Alabama has an economic nexus standard of $250,000 in annual sales. Tennessee has an economic nexus standard of $500,000 in annual sales.
Other states that currently have an economic nexus standard in some stage of enactment include: Maine, Massachusetts, Mississippi, Ohio, Pennsylvania, Rhode Island, North Dakota, Vermont, and Washington. All remaining states would likely follow.
If the U.S. Supreme Court rules in Wayfair’s favor and upholds the physical presence test in Quill, then all retailers (online, remote or otherwise) who have sales in states in which they do not have a physical presence, could continue to not collect sales tax.
Under this scenario, the states are likely to continue the trend of adopting notice and reporting laws that can be even more burdensome then simply collecting sales tax. Therefore, just because Quill would be upheld, doesn’t allow retailers to breathe easier. Retailers would still have a decision to make:
- do we comply with the notice and reporting laws; or
- do we simply collect and remit sales tax?
States that currently have some type of notice and reporting law include: Alabama, Colorado, Kentucky, Louisiana, Oklahoma, Pennsylvania, Rhode Island, South Dakota, Tennessee, Vermont and Washington.
Regardless of the outcome, retailers who exceed the applicable thresholds, should start analyzing their sales activities and assessing whether collecting and remitting sales tax is more cost effective than complying with notice and reporting laws. Sales tax reform is coming one way or the other.
LBMC tax tips are provided as an informational and educational service for clients and friends of the firm. The communication is high-level and should not be considered as legal or tax advice to take any specific action. Individuals should consult with their personal tax or legal advisors before making any tax or legal-related decisions. In addition, the information and data presented are based on sources believed to be reliable, but we do not guarantee their accuracy or completeness. The information is current as of the date indicated and is subject to change without notice.